Description

Thesis

1 – ETSY’s end markets should grow HSD allowing ETSY to grow GMS at a 10% CAGR

Their retail TAM grows a little above inflation plus population growth. 4% a year. Adding in a 100bps mix shift to e commerce from brick and mortar results in a 8% CAGR for their US market.

ETSY – International makes up 45% of revenue and is growing faster than the US. Allowing ETSY to grow GMS at a 10% CAGR

2- ETSY has room to increase its take rate slightly.

Some investors believe ETSY’s take rates are high. I don’t think they are making a correct apples to apples comparison. The most expensive is AMZN at an estimated 33% take rate, including 2.5% net fulfillment fees (the profit AMZN makes on FBA). I estimate a 9.8% fee rate on advertising on AMZN, which has become essential. The current antitrust case makes it clear that AMZN will push listings far down the search results page unless sellers pay for advertising.

On EBAY take rates will vary depending on which plan you sign up for. Lower volume sellers cannot afford to pay the monthly fixed fees and end up paying over 20% take rate. If you are a higher volume seller you can achieve a 16.7% take rate in my estimation. This is comparable to ETSY’s 19.8% take rate if you assume ETSY’s offsite ads generate incremental traffic and revenue.

I view the biggest threat to be sellers building their own website and selling direct through a combination of GOOG and SHOP. However the economics rarely work in favor of the merchant as I will explain further below. Unless the merchant can generate a large percentage of their traffic through word of mouth, their take rate should exceed what they pay on ETSY at an estimated 20.9%.

Given that I believe ETSY is the most effective sales channel for the vast majority of its sellers and GMS, I believe they have room to raise their take rate. Mostly by introducing paid services. Some large sellers want a dedicated sales rep and account service team. Based on my research, they are willing to pay for it.  There are also very high switch costs once you are established on Etsy. They control your customer list. Some sellers can build their own customer list by sending business cards in their packages and offer a promo if the customer buys from the seller directly. But most sellers have not succeeded in converting users over to their own website. My research indicates that sellers find Etsy’s fees fair. They would like more services and are willing to pay for them.

3 – ETSY is the best platform to sell for the vast majority of sellers and GMS

For now, I view GOOG + SHOP as the strongest alternative. Out of 50 of the top 100 ETSY sellers I track, 75% have their own website. And they rarely build it with ETSYs plaid service, their version of SHOP. However, my research indicates a seller needs 20k social media followers or a 20k customer list to generate enough organic traffic to make selling direct feasible. Of the top 50 sellers, only 30% reach that threshold. After speaking with a dozen of them, it’s clear that it is very hard to build a business directly. The CAC on Google is higher than the 15% I model above. Unless a seller has an established website, you need high volume to rank on the first page of search results where 95% of searches end. Out of the 12 I spoke with, only 2 had a meaningful biz going direct. Part of the reason is that going direct involves a sophisticated capability in online marketing. Most sellers cannot afford to hire a full time person to do that job or to outsource it.

You can see this in the data. Top sellers rarely leave Etsy, almost never.

4 – ETSY has a lot of untapped opportunities. Notably to copy Faire.com and enter the wholesale market.

Etsy tried a wholesale model back when they IPO’d. it failed. I concluded that it failed bc Etsy did not make it a focus and did not learn from their mistakes and gave up. Their biggest mistake was trying to build a wholesale market connected Etsy sellers to large national merchants. There is little value to that. Large retailers seek out top Etsy sellers at craft fairs or by direct contact. The value of a wholesale marketplace is to connect Etsy sellers with brick and mortar mom and pop retailers. Faire.com is likely approaching $2Bn in GMV, albeit by burning cash to acquire customers via offering promos. Of the top 50 sellers I track, 16% sell on Faire.com offering wholesale prices that are 60% of their listed retail price on Etsy. The sellers I spoke with would prefer to work with Etsy. They do not like having to manage two separate listings and it is hard to enable their inventory systems to reliably track sales on Etsy and Faire.com. these sellers would like to move their Faire.com business to Etsy when possible. Furthermore, several other sellers who did not sign up to faire said they would sign up to an Etsy wholesale marketplace, as they do not want to manage two separate platforms.

My research concludes that Etsy can help its top sellers much more than it does. The company says they are in constant contact with top sellers but I don’t believe they do enough. They say they are trying to work more closely with top sellers. If they do, I think they will unlock a material amount of GMS. For example, one common seller criticism is that Etsy does not allow a seller to offer custom shipping rates if a buyer has multiple items in their shopping cart. Instead, the buyer sees a $40 total shipping fee when the seller can offer a $15 fee. Sellers want Etsy to add a button allowing buyers with multiple items in their shopping cart to ask for a custom shipping rate. My estimate is that this change could unlock > MSD increase in GMV. There are several other suggestions that Etsy can implement that can add > 10% to GMV in total.

Etsy has the opportunity to build a strong loyalty program, including allowing sellers to offer loyalty rewards directly to their own frequent buyers.

5- Etsy’s current slowdown in GMS is mostly due to the end of covid plus a slowdown in consumer discretionary spending

You can see this in the census retail sales data which has slowed for Etsy categories and in the SSS of brick and mortar peers that overlap with Etsy’s retail categories. Overall the census data is flat v 2021 with categories up LSD to down MSD. Brick and mortar peers have sales up 10% to down 12% with most down MSD to HSD.

RISKS

1 – Google, social media, Amazon, Temu/Shein represent alternative to ETSY

Etsy is a unique brand that offers unique products. 80% of traffic is organic and that hasn’t changed. They are seen as an authentic and trusted place to find unique items by 87% of people.

Another risk that Google poses is that customers can search google just as they could Amazon for products similar to what they can find on ETSY.  However, half the time search results send you to mass merchants like WMT, KSS, TGT. The next most likely search result is a niche online store that sells low end mass produced items. I estimate that 20% of the time they have a solid niche online store that has good merchandise.

Amazon – AMZN took on ETSY years ago with AMZN homemade but has made little progress and is not a threat. They are very difficult for sellers to work with, asking for a lot of info up front including on which suppliers you use. AMZN claims it is to make sure you are making home made/designed goods but in reality they use that info to create knockoffs should your goods sell well on AMZN. And their fees are very high.

EBAY is a poor alternative. Many top sellers left EBAY for ETSY a decade ago. 90% of GMV on EBAY is used and the customer is no longer there. 14% of the top 50 sellers I track have a store on ebay but they list 263 SKUs on average compared to 5.6k on ETSY. EBAY is not a material source of their revenue, they just never shutdown their store presence on ebay and get a few sales here and there.

Social media – most top Etsy sellers have found it very hard to build an audience. When they do, they mostly still prefer to sell through Etsy than on their own website. The main reason is they have found that customers convert more easily on the etsy site bc they trust it.

Temu is the latest threat to Etsy. They remind me a lot of Wish, Shein and Ali Express except they are spending a fortune on marketing, free shipping and promos to build user engagement right now. They launched at the start of 2023 and are owned by PDD. My estimate is that on 20% of SKUs or categories they offer something that an Etsy buyer could be interested in. however, the shipping times are much longer and I presume that once shipping promos end, the final cost to the user won’t bd that different than Etsy. Etsy claims that Temu barely overlaps with their user base. I doubt that, but I do see them as offering a different purchase decision, similar to buying cheaply produced stuff from china on Amazon.

2- a new rival could come out from nowhere and leapfrog Etsy through sophisticated technology.

There is no such threat on the horizon but it is possible.           

3 –Etsy has likely destroyed $1.75bn of value their rollup of niche marketplaces

Depop may prove ok in the long run. But I estimate a 5.5% ROIC on Reverb and 1% on the Depop (but it has strategic potential). The company seems to be done with M&A. they recognize it has not gone to plan.

4- in the long run, they can become like Ebay. Where they no longer innovate and the product and tech becomes old.

I see no sign of this. the current management team is great.

Catalyst

earnings